13 figures at last? What investors are looking for from Apple earnings Tuesday

Apple Inc. is just one good earnings beat away from becoming the world’s first US$1-trillion public company this week.

The Cupertino, Calif.-based technology behemoth is due to report its third-quarter earnings after the closing bell on Tuesday, when the usual mix of iPhone shipments, revenues and profit will be measured against the expectations of an army of analysts tracking the company’s every move.

Apple rarely falls short of quarterly performance estimates, making it a decent bet that this is the week investors will see their first 13-figure valuation.

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"I predict an all-around beat … driven by a heavier mix of higher-priced iPhones, momentum in iPads and strength in services,” Gorilla Trades strategist Ken Berman said in a note, suggesting the subsequent stock move will be enough to push the company “past the vaunted $1-trillion valuation.”

The third quarter of the fiscal year is typically Apple’s least eventful, as the existing slate of devices loses steam and investors look ahead to the fall product refresh.

iPhone sales account for most of Apple’s revenue – more than 60 per cent last year – so the market will be eager for any hints about the release of new models.

The company is rumoured to be planning the launch of three new iPhones, including an upgrade of the flagship iPhone X, in September. A more affordable LCD model, however, could be delayed until October, Katy Huberty of Morgan Stanley said in a recent note.

If so, that could negatively affect the company’s financial forecast for the fiscal year’s final quarter, which is when new products start to ship.

Fourth-quarter guidance on Tuesday could disappoint the market as a result, Ms. Huberty said. Analysts are expecting US$59.5-billion in sales and US$2.65 in earnings per share for the fourth quarter.

But there’s more to Apple than the iPhone. Increasingly, services are playing an important part of the revenue mix, as cloud-based offerings such as the App Store, iCloud, iTunes, Apple Music and Apple Pay gain traction.

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Growth in services revenue in the third quarter is expected to come in at about 26 per cent over last year, which is helping to offset declining sales of last year’s iPhone models.

Looking beyond this year, iPhone growth is expected to level off over the longer term, as the global device market matures and Apple’s competitors narrow the innovation gap.

Apple’s continued growth, as a result, will increasingly rely on its services, RBC Dominion Securities analyst Amit Daryanani said in a note.

“We think Apple eventually transforms from a device to a services company,” Mr. Daryanani said, noting the services category is expected to become a $50-billion business by 2020.

“By 2025, we could see Apple looking at iPhones as merely a means of expanding the installed base with the real monetization being done via services,” he said.

While Tuesday’s guidance will be important, the market will by no means be ignoring third-quarter performance. Consensus estimates are for earnings per share of US$2.16 on sales of US$52.3-billion. Falling short of those benchmarks would likely put the US$1-trillion market capitalization a bit further beyond reach. Over the past year, Apple’s stock is up by 27 per cent.

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On the other hand, a strong showing from Apple could help calm nerves after Facebook Inc. and Twitter Inc. both bombed last week in their earnings reports.

While raising serious questions about their respective growth profiles, Facebook and Twitter both saw single-day share-price declines of around 20 per cent, raising concerns about the fate of the boom in tech stocks that has run for several years now.

Over the past five years, the FAANG group of stocks, which includes Facebook and Apple, as well as Amazon.com Inc., Netflix Inc. and Google parent Alphabet Inc., have posted average individual growth rates of between 23 per cent and 60 per cent per year.

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